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You’ve got questions?…We’ve got answers.

Q: How should a not-for-profit senior living community objectively segment the financials of charitable mission initiatives from the basic senior living business operations?You've got questions?...We've got answers.

A: This is a three-step process.

1) Create an income statement and sheet that includes only your senior living business operation (revenue, operating expenses, profit, debt service, cash flow, etc.). If necessary, show any cash from the business operation that is needed to fund charitable initiatives as a separate financial burden below the operating profit and net cash flow line entries. The expected outcome is the execution of sound business practices while meeting industry benchmarks for financial performance.

Continue reading “You’ve got questions?…We’ve got answers.”

It’s a New Year, New Plan, New Game – Welcome 2017

Happy New Year! The beginning of a new year.  Does that spark excitement in you? A clean slate to create and take advantage of new ideas and opportunities.  Or is it just another day? The current competition in the senior living and housing market can be fierce so if January doesn’t make you take inventory and commit to make a change, you need to get in the game!

Do Not Rest On Your Current Success

Now, this doesn’t mean you must totally revamp your business strategy (unless it is drastically failing).  But each year should bring new ideas and new goals.  Even if business is booming, resisting innovative additions or changes can see that success falter eventually.  Amazon is a great example of implementing new and innovative ideas into an already successful business.  No one can deny that Amazon’s business has been on the upswing for an extended period.  The secret to their success is that they are a step ahead with new ideas as the previous ideas run their course.  The Apple iPhone is another great example.  Same product, a phone, yet it is continually being updated and improved as to avoid letting the competition pass them up and it keeps their customers excited for what is new.

Continue reading “It’s a New Year, New Plan, New Game – Welcome 2017”

Divide and Conquer Then Bring It Back Together: Sharpened Financial Focus

by Jim Moore

How can I develop a more sharpened financial focus on my campus which has multiple living arrangements?

Great question.  The Senior living business is becoming increasingly complex.  The continuum of products and services is growing.  There is a pressing need to optimize the financial viability of each individual product or level of care on your campus.

Divide and Conquer Then Bring It Back Together: Sharpened  Financial FocusConsolidated financials provide the big picture/summary approach, but to determine the true financial sensitivity of your organization you must develop individual cost/profit centers within your continuum.  Simply combining three or four businesses within a community into one overall consolidated income statement of revenues and expenses is not the best practice for the future.  Just using consolidated financials can frequently mask unacceptable subpar performance of one cost center, while penalizing the overall operation.  Each individual major product and service offered should meet reasonable industry financial benchmarks of revenues, expenses including an overhead allocation, net operating income, profit margins and cash flow.

Each cost/profit center should have initial stand-alone income statements before being merged into your consolidated financial statements.  It’s true that you must provide a seamless consolidated continuum of products and services for your residents.  However, each key element of this continuum must first be segmented as a stand-alone cost and profit centers and then (and only then) combined to track the overall campus results on a consolidated basis.

The stand-alone cost/profit center is a concept whose time has arrived.  It is already being implemented by progressive sponsors and owner/operators.  The benefits include sharpened pricing, focused cost controls and potential overhead cost reduction.  Finally, the concept is fast becoming a key element of a state-of-the-art business practice.

Do you have a question or need help with the complexities of multiple cost centers? Contact MDS today to see how we can help.

One Company, Many Departments; One Strategy or Many

by Kim Jimenez

When talking about your organizational goals, is every department within your company on the same page? Have you shared or even included all departments in goal setting and strategy development? Does your Human Resources department act as part of the strategy team for your community and your company or do they perform as an auxiliary function?

One Company, Many Departments; One Strategy or Many

People can make or break your organization. The front-line employees who interact with the public. The CNAs and nurses who care for your residents. The receptionist who greets everyone who walks into your office or facility. The marketing team who puts out the marketing material and branding that can draw in new business (or not). Your top management and executives who define and plan the company brand and strategy. So, don’t you think the department responsible for recruiting all these people need to be an integral part of the company strategic plan? Absolutely!

Think about what your Human Resources Department is responsible for:
• Recruitment and Hiring
• Orientation/Training/Development
• Compensation
• Benefits
• Payroll
• Health and Safety (Risk Management and Worker Protection)
• Employee Engagement (Retention)
• Equal Opportunity Employment Compliance

In addition, each of these activities can be broken down into multiple tasks. Your HR department is responsible for your staffing, the performance of your staff, legal compliance for your organization and keeping your employees happy. No small task!

So, while you expect your HR department to perform in this way, they can sometimes get boxed in to just performing task after task, putting out fires day after day. Do they know what you expect of them? Do you truly know what to expect out of your HR department? Do they understand the strategy of the organization in order to hire the right people for the job? Can they explain your brand, culture and goals to potential employees to be sure they understand the job expectations? If you are experiencing high employee turnover, you really need to explore the answers to these questions.

Make sure you include your HR manager in strategy development. Coordinate efforts between organizational goals and the people who must perform to achieve these goals.

Kim Jimenez has been a regular contributor to the MDS website and MDS blog for the past 15 years.  Kim holds a supervisory position in a Fortune 100 company and has experience with a multitude of employee, training and leadership issues.  She obtained her Bachelor’s Degree concentrated in Human Resource Management from Southern New Hampshire University

2017…It’s Closer Than You Think!

As we approach the end of 2016 (sorry, but yes, it is coming at you like a speeding locomotive whether you admit or not!) we hope you are actively evaluating where you are in terms of your 2016 goals.  Are you on track to accomplish everything you set out to accomplish? If not, why not?  Did you set goals that you have since deemed unnecessary, do you need more time or do you need a different strategy? What new goals have developed?

One of the many areas you need to be evaluating is your aging physical plant and capital investment.  Capital investment/improvements on an ongoing basis are crucial to keeping your senior living community in a competitive condition. If you have a newer facility you may be in the planning/budgeting stages but if your community has some years on it, you should be making these improvements to stay viable.  Either way, capital investment is something you need to be thinking about no matter how old or young your community is.

Three Capital Investment Traps

In planning a capital investment strategy, many owners and sponsors frequently commit three tactical errors.  They:

  1. Spend money on the wrong things
  2. Lose sight of their overall strategic objectives
  3. Pay too much for less-than-optimum value

Consider Two Important Time Frames

In developing a new senior living community or improving an existing one, capital expenditure decisions must consider two distinct time frames:

  • Short-Run – The initial (one time) costs of the capital investment
  • Long-Run – The ongoing (perpetual) operating costs of ownership

Cost of Ownership Considerations

To plan effectively, you must carefully weigh the short run capital cost expenditures (immediate capital costs, such as new heating, ventilation, and air conditioning systems) against the long run costs of ownership (ongoing operating costs such as maintenance, utilities, and insurance). Investing less in capital improvements in the short run can sometimes be very expensive over your total ownership period.  These cost considerations become very important if you plan to hold your property for more than five years.  Even if you plan to be a short term property owner, realize that your ultimate sale value can be adversely affected by your earlier “short run” capital investment mentality.  The buyer’s sophisticated due diligence efforts will likely detect flaws in your original capital investment planning.

These four simple steps should help you make important cost of ownership trade-off decisions:

  1. When considering two alternative capital investments evaluate the payback period and calculate the impact on total community value. How many years of operation are required for the operational savings/benefits to result in financial break-even or recovery of each of your alternative initial cash investment options? This can be a simple arithmetic calculation (dividing the initial cost of the capital investment by the estimated annual financial benefit or savings) or a more sophisticated discounted cash flow analysis that takes into consideration the time-value of money invested.  Ideally, your payback period should be between three and five years.  From that point forward, there should be an ongoing positive incremental financial impact.
  2. Estimate the total impact on community value. To determine the increased intrinsic value of your community, you should capitalize the incremental increase in your net operating income resulting from the capital investment1.  The capitalization rate is the cash return (percentage) that reasonable buyers or investors would expect to realize on their cash investment. This would obviously be influenced by their perception of relative risk.  Appendix C briefly describes the capitalization rate concept.
  3. Value engineer your capital investments. This means lowering or controlling capital costs without significantly detracting from the look, operational efficiency, or marketplace acceptance of your community.  The results of this effort should be largely invisible to the consumer marketplace.
  4. Let the “flash value” concept influence capital investment. Flash value is a fairly obscure, but surprisingly simple, way of quantifying, and thereby maximizing, perceived value in the eyes of the consumer.  This concept is defined as follows:

Flash Value Index  =    What Consumer Thinks an Item Costs

                                                      Your Actual Cost

Through consumer testing (focus groups, etc.), you can identify a menu of design features and amenities that exhibit a positive “flash value index” of greater than two to one.  This means that the consumer thinks the item is worth at least twice as much as your actual cost.  You should incorporate a number of highly favorable flash value items into your community.  Typical high flash value items in senior housing include high-quality wood molding or millwork, walk-in closets, unusual (but attractive) public spaces, recessed solid-core living unit entry doors, incandescent or new LED lighting vs. traditional, older fluorescent lighting, wall coverings and artwork, interesting roof lines, and “breaks” in exterior elevations.  The list could go on, but the ideal outcome is for a senior prospect and their family to comment, “This place sure seems to offer a lot for the money!”

Call to Action

      Before you move on, remember you can get very creative with your capital investments by taking four basic steps:

  1. Evaluate the investment payback period.
  2. Estimate the total impact on existing operation and long-run community value.
  3. Value engineer for cost investment savings.
  4. Invest in flash value to enhance perceived value.

Finally, address the key question, “Is now the appropriate time to take action?”

To Understand What Works, Drill Down

 

[This article by Jim Moore previously appeared in the industry publication McKnight’s Senior Living]

It is generally recognized that the senior living business is becoming more complex with increasing need for operational sophistication and innovative best practices. The senior living continuum of products and services is growing. There is a pressing need to optimize the financial viability of existing communities through revenue enhancement and expense reduction.

Yet in spite of these generally recognized complexities and challenges, many sponsors and owner/operators still focus exclusively on tracking and evaluating their financial position on a broad consolidated basis. This is a great big-picture summary approach, but the true financial dynamics and sensitivity of the organization must address the development of individual cost and profit centers within the continuum. Simply combining three or four businesses within a community into one simple consolidated income statement of revenues and expenses is not the best practice for the future. In reality, each of these major product and service businesses should meet reasonable industry financial benchmarks of:

  1. Revenue
  2. Expenses
  3. Net operating income
  4. Profit margins
  5. Cash flow

Each cost center must initially stand alone before being merged into the consolidated financial statement. Just using consolidated financials can frequently mask unacceptable sub-par performance of one cost center, while penalizing another one.

Clearly owner/operators must provide a seamless consolidated continuum of products and services for their aging residents. But this consolidated continuum is really composed of a number of individual business models with unique challenges and opportunities. Each key element of this continuum must first be segmented as standalone cost and profit centers and then (and only then) combined to track the results on a consolidated basis. Each business element must be successful individually.

Let’s take a look at a typical example. One of my clients operates a comprehensive CCRC that has independent living, assisted living/dementia/memory care, nursing/rehabilitation and assistance-in-living/wellness as major components in their seamless continuum for their residents. These components have each been segmented as these standalone profit centers. Individual income statements exist for each one. These individual income statements include earned operating revenues, operating expenses including direct costs and an appropriate overhead allocation that applies to that cost center, individual net operating income, profit margin and cash flow. These financial statements also include monthly and year-to-date budget versus actual results and, where appropriate, a discussion of why variances occur.

This approach also quantifies and enhances the objective assessment of key staff member performance. Coupled with resident satisfaction scores, this provides an objective criteria for addressing important initiatives.

The senior living continuum is becoming more complex, with services like comprehensive assistance-in-living within independent living, geriatric assessment, memory care and external continuing care at home. Financial performance sensitivity is also increasingly putting more pressure on profits, debt service coverage and capital investment needs impacting overall cash flow for aging physical plants.

The standalone cost and profit center is a concept whose time has arrived. It is already being implemented by progressive sponsors and owner/operators. The benefits include sharpened pricing, focused cost controls and potential overhead cost reduction. Finally, the concept is fast becoming a key element of a state-of-the-art business practice.

Need help drilling down your financials? Contact MDS at 817-731-4266

 

Let Seniors Out of the Box!

 

A recent article in Senior Housing News shows how one community takes on the challenge of seniors and technology.  This community looked outside its own walls to form a partnership that brought great value to the community’s program offerings but more importantly, value to their residents.

Don’t Limit Seniors

So many times we make assumptions which limit both us (as individuals and companies) as well as those we make those assumptions about.  We make assumptions based on our own opinions as well as past knowledge.  We must not only keep an open mind but embrace that times and people change and evolve.  In our minds, we might limit seniors’ interest and ability when it comes to technology.  We think it will be too difficult, we think they are not interested and even THEY may have these same thoughts.

Technology is Increasingly User Friendly

Do your residents shy away from technology? Some may not be interested because they think it is too complicated or difficult even if they wanted to learn.  Equipment is becoming increasingly user friendly and apps make that equipment even easier…well, sometimes.  With so many options, it is not hard to find systems even the most timid can learn and use.

Reducing Isolation

We often criticize technology for isolating our younger generations by limiting their interaction to technological means vs. human interaction.  While that is most definitely a valid argument, some populations are isolated due to circumstances such as residents in senior housing with family in distant locations.  Technology can open doors to communication and interaction.  Emails, video-chatting, Facebook, and other applications can give those residents access to family and friends they may not have right now.  If these residents have family far away, what a gift to be able to see them and be able to stay up to date via video and pictures.

Comfort Zones

While technology may be out of the comfort zone of both the senior student to learn it and the staff who is designated to teach it, rewards can be significant. Don’t hesitate to look outside your community for help with instituting such programs. As this article illustrates, finding partners outside your community can benefit your community as well as your residents.  It does not have to be a partner as large as Google, local businesses and organization offer a wealth of knowledge and resources.

It is a common adage that life happens outside our comfort zone and our senior residents are no different.  When we are pushed to learn and grow, we find confidence, opportunities and great satisfaction in overcoming perceived obstacles.  Find ways to help develop this confidence and satisfaction in your residents.  Give your residents challenges every now and then.  Lifetime learning is exactly what is says, a lifetime of learning no matter your age.  We should adopt this concept not only for ourselves but for our residents as well.

An important reminder for us and them; we are never too old to learn something new.

"You’ve Got Questions…We’ve Got Answers"

In additional to authoring several books based on his years of experience in Senior Housing, Jim Moore has published countless articles for both mainstream and market specific publications.  Jim answers your questions in regards to strategy and operations every month in McKnights Senior Living

You Asked: Do I Need An Exit Strategy?

Many owner/operators say they don’t intend to sell; they plan to ride out the various business cycles and they’re not about to leave the senior living industry. But having a sound exit strategy doesn’t necessarily mean you’re actually planning to get out. It’s somewhat like thinking about our life expectancy. To stay healthy, should you do anything differently? In early 2016, you can use an exit strategy for several beneficial reasons.

Here is a simple strategy for estimating the approximate value of this exit strategy by determining today’s valuation, using a capitalization rate of 7%. Simply divide your actual annual net operating income (NOI) by 0.07. If your community has annual revenue of $3.6 million and expenses of $2.3 million representing an operating profit margin of 36%, then the NOI from this performance would be $1.3 million. Dividing that annual NOI figure by 0.07 reflects a preliminary value of approximately $18.6 million. Many who went through that simple exercise have changed their attitude about whether to consider an exit strategy.

Whether you actually decide to sell is an important decision. Whether you plan to fold your cards soon or hold them for a long time, having a sound exit strategy can only help.

To find out how Jim and the staff at MDcan help you in regards to developing your exit strategy, contact us today.

Minimum Wage Issue Can Impact Senior Living

There Is A Win-Win Strategic Solution

The potential impact of the emerging minimum wage increase on Senior living is currently unclear.  Right now it may be speculation, but it could become very real in the near future.  Now is the time to anticipate a future impact and develop an appropriate response.  The good news is that regardless of the minimum wage impact on Senior living, there are available practical responses that will have a favorable long run impact for astute owner-operators.

 The minimum wage issue is clearly an ethical dilemma and a real world business challenge.  Two conflicting issues are emerging; a legitimate moral and financial concern for lower paid, entry level employees versus a potentially serious fundamental business impact.

Many feel that modestly increasing the standard of living for lowly paid workers is the right thing to do.  But price and profit sensitive businesses with high concentrations of low-cost workers are concerned.   Industries like fast food would be dealing with several critical variables like higher prices, possibly a lower customer base, or lower profits.  Consideration is also being given to lowering cost by reducing entry level employee counts.  Simply stated, the fast-food industry and other businesses may have to reevaluate and adjust their business model.

There are also concerns that if the baseline minimum wage of $7.25 per hour (the current Federal standard), is increased by approximately $1.50 to at least $8.75 per hour, there could also be pressure to increase the hourly wages of other lower paid entry-level employees in an attempt to sustain the current offset from the increased minimum wage.  New York, California, Oregon, and Connecticut and Massachusetts have already set their minimum wage higher than $8.75 per hour.  Other states already either have an official minimum wage of at least $8.00 per hour or considering similar increases.

How Might This Affect the Senior Living Industry

There is a heavy concentration of entry level workers at a typical independent living or assisted living community.  Those entry level positions typically include housekeepers, laundry personnel, cooks, servers, and other dietary employees, as well as drivers, security personnel, some maintenance positions, and healthcare workers.

Let’s look at a typical 110 unit assisted living community with 55 Full Time Equivalent Employees (FTEs).  This staffing ratio of 0.5 FTEs per unit is a typical benchmark.  The types of lower wage earner workers mentioned earlier totals 43 FTEs.  Their current entry level wages range from $11.00 per hour (housekeeper, laundry and some health care support, security and maintenance workers) to $11.70 per hour for CNAs.

There could eventually be pressure by workers, labor unions and other interest groups to attempt to sustain the current offset between minimum wage levels and other entry level worker pay.  For example, if the minimum wage is increased by approximately $1.50 per hour, this offset, if also achieved by other workers, will have a significant financial impact on this assisted living community.

A financial sensitivity analysis of this issue revealed the following:

  • Annual Payroll Increase of $149,800 or 10.2%
  • Total Expense Increase of 4.5%
  • Net Operating Profit Margin Decrease of 3.4% (from $1.5 million to $882,450 in net income)

At an 8.0% capitalization rate, the intrinsic value of this community would decrease by approximately $1.9 million.  Granted, the potential minimum wage increase impact on other entry level wages involves speculation at this time, but the change is very likely to occur.

There is a viable win-win solution to this potential financial dilemma.  The solution involves three basic initiatives:  1) Reducing overall operating expenses, 2) Enhancing revenues and 3) Realizing organic growth through increased occupancy and expanded services within the community.  This strategy can be a very significant win-win solution because it addresses both the potential minimum wage financial impact and also improves the community’s long run financial performance.

BE PREPARED FOR STRATEGIC CHANGE

 

Our Industry Is Entering Into The “Second Generation”

When we think of “generations” we typically consider population in general and our peers, children and grandchildren.  We know unique generations commonly think differently in terms of lifestyle, finances, how they spend their money and their perception of value . . . in other words their “psychographics” are different.  The term psychographics is broadly defined as the use of demographics to determine the attitudes, perceptions and behavior of a particular segment of our population.

Let’s sharpen the definition of population psychographics and apply it specifically to our senior living industry in terms of two important consumer generations; 1) The Silent Generation, ages 70 to 90 – age, income and asset qualified seniors as potential residents for our communities and 2) The Baby Boom and Baby Busters ages 55 to 64 – the decision influencers for senior living.  Let’s also consider the professionals that design and operate our communities.  These designs and operating strategies are changing.

There are dramatic differences we need to address as we make the critical transition into the second generation of our industry.  They involve two primary consumer generations:

1. The Silent Generation – 1925 to 1945. This generation has two major components:

  • The Depression Era (1929 to 1939). When I talk to seniors and conduct senior focus groups, I always ask, “Does having lived through the Depression in any way affect your financial decision-making today?”  The answer is always a resounding
  • World War II (1940-1945). GIs came home from the war, married, bought homes and had children in record numbers (the Boomers).  These veterans were motivated to make up for lost time.  After getting educated under the GI Bill, they built businesses, careers and built personal savings.  They are generally fiscally conservative.

2. The Baby Boomers – 1946 to 1964. The Boomers and the Baby Busters (1965 to 1980) have a current age spectrum of 35 to 69.  Their psychographics are:

  • The “Gray Flannel Suit” Era (1946 – 1980). During this period, many men and women entered the corporate world prepared to spend their careers with one employer.  They were generally “team players” – conforming, spending their time responding to the requirements of their employers as they worked through their careers.
  • Vietnam Era & the Rebellions of 1960s & 1970s. This troublesome period (1960 – 1974) created large groups of disillusioned veterans and many “maverick consumers”. A large portion of the population did not accept these nonconformists, which only triggered further rebellion against “the establishment”.

The younger element of the Silent Generation and the Boomers are the foundation of the emerging second generation of our industry.  Their attitudes and opinions have also been shaped by the boom/bust cycles of the past 20 years and the very low savings rates experienced by fixed income seniors.

The typical life cycle of the Silent and the Boomer generations has been defined as approximately 18 to 20 years old respectively.  The modern day senior living industry “first generation” life cycle is defined as approximately 30 years (1985 to 2015).  Just like consumer psychographics and trends, some dramatic strategic changes are taking place in our industry

Tomorrow’s senior living marketing prospects are no longer “the usual prospects.” They are raising the bar of expectations and will be much more articulate in expressing their wants, needs and perceptions of value.  It’s time to redouble your efforts at understanding today’s age 75-plus consumers while becoming more savvy about how you market to them.  Actually, quite a lot is known about the current mindset of the senior consumer; the challenge is translating this knowledge into practical communication and marketing strategies.  Take, for example, pricing.  Most of us know we should sell tangible value before price.  But, in our zeal to tell our story, we forget that the process involves three very important steps:

1) Truly understand the senior consumer mindset

2) Identify and correct common senior misconceptions

3) Deploy consumer-focused, market-driven positioning

Finally, realize that we are evolving to another generation of prospects and we are dealing with senior consumers who have experienced a number of life-changing events.  The financial implications are enormous.

A word of caution: Don’t get misled by the opinions expressed by your existing residents.  These opinions may no longer necessarily reflect the changing mindset of your future residents.

Jim Moore is president of Moore Diversified Services, Inc., a national Senior housing and health care consulting firm based in Fort Worth, Texas.  He has written several books about assisted living and Senior housing, including Independent Living and CCRCs. Jim is also a regular contributor to industry publications such as McKnights Long Term Care News and various industry association publications.  Contact MDS at 817-731-4266 to discuss your consulting needs.